Charting a major trend reversal? No

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CINCINNATI (MarketWatch) — The Dow Jones Industrial Average has just notched its worst single-day loss since September, while the S&P 500 Index and the Nasdaq Composite have posted their biggest daily downturns in two months.

Against this backdrop, technical tests are in play, though the market uptrend hasn’t cracked. The charts below add color:

Before detailing the U.S. markets’ wider view, the S&P 500’s hourly chart highlights the past two weeks.

As illustrated, the S&P has plunged to three-week lows, violating former support.

From current levels, its breakdown point — S&P 1,824 — now marks first resistance, and the response to this area should be a useful bull-bear gauge.

Meanwhile, the Dow industrials’ near-term backdrop is similar.

Here again, the blue-chip benchmark has plunged to three-week lows, knifing straight through former support.

Looking ahead, the Dow’s breakdown point of 16,370 marks its first notable resistance. If this is a “real” trend shift, then Dow 16,370, and S&P 1,824, would be expected to draw sellers on the first retest.

And the Nasdaq Composite has taken a shaky technical turn, though its backdrop remains stronger.

The index traversed its two-week range in Monday’s action, closing at 4,113, or just above gap support.

Widening the view to six months adds perspective.

On this wider view, the Nasdaq has reversed sharply from its latest 13-year high, established last week.

Significant support rests at its breakout point, spanning from the November peak of 4,070 to the early-December high of 4,082. A violation of this area would strengthen the bear case.

Moving to the Dow, the blue-chip benchmark has reversed sharply from all-time highs.

In its case, significant support rests at its corresponding breakout point, the November peak of 16,175. The Dow’s 50-day moving average (in blue) is rising to meet this area.

And the S&P 500 Index has also sold off from record territory.

As detailed previously, its first notable support rests at the November peak of 1,813, and the S&P bottomed Monday at 1,815.

More plainly, the S&P has initially drawn buyers at significant support.

The bigger picture

As detailed above, the major U.S. stock benchmarks have started the week with a swift downdraft.

Specifically, the Dow Jones Industrial Average has notched its worst single-session loss since September, while the S&P 500 Index and the Nasdaq Composite have posted their biggest daily downturns in two months.

Nonetheless, the immediate technical damage has thus far been limited.

Moving to the small-caps, the iShares Russell 2000 Index has maintained support at its breakout point.

A more significant floor rests at its four-month trendline — matching the 50-day moving average — and the group’s path of least resistance points higher barring a violation of this area.

Meanwhile, the SPDR S&P MidCap 400’s backdrop is slightly stronger.

The index closed last week at all-time highs, and has pulled in modestly from this area.

Here again, significant support rests at its four-month trendline — matching the 50-day moving average — and its uptrend is intact barring a violation of this area.

And moving to more widely-tracked levels, the S&P 500’s backdrop highlights two notable areas:

S&P support at its breakout point, the November peak of 1,813.

The S&P’s 50-day moving average, currently 1,803.

The S&P bottomed Monday at 1,815, and has initially drawn buyers at well-defined support.

Stray notes

Monday’s pullback was driven by respectable, though not off-the-charts total volume. But more importantly, the underlying market breadth failed to reach bearish extremes: Down volume surpassed up volume by 4 to 1 on the NYSE, and by 3 to 1 on the Nasdaq. In a textbook world, a 9-to-1 negative-breadth reading would reliably raise the flag to a meaningful trend shift.

The Volatility Index had spiked 9.4% at Monday’s close, and moves of 10% are typically terminal events. The very near-term market downside is limited.

And perhaps most notably, the underlying sector rotation — detailed in the next section — remains technically innocuous. Monday’s downdraft was primarily driven by the retail sector.

Could the retail-sector downturn lead a major market trend shift? Sure.

Would this be typical? No.

Summing up the backdrop

All told, the January consolidation phase remains underway.

Significant support spans from S&P 1,803 to 1,813, detailed above, and its path of least resistance technically points higher barring a violation of this area.

Tuesday’s Watch List

The charts below detail names that are technically well positioned. These are radar screen names — sectors or stocks poised to move in the near term. For the original comments on the stocks below, see The Technical Indicator Library.

Charting the market leaders

Drilling down further, the traditional market leaders — the transports, technology sector and the financials — have turned lower this week, though the immediate technical damage has thus far been limited.

Starting with the transports, the iShares Transportation Average
IYT, -0.37%
has pulled in to first support from all-time highs.

On further weakness, a more significant floor rests at its breakout point, a level matching the November peak and its ascending 50-day moving average.

The group’s uptrend is technically intact.

Meanwhile, the Financial Select Sector SPDR
XLF, -0.14%
has pulled in to its breakout point from five-year highs.

Still, the group is positioned atop its 50-day moving average — a useful intermediate-term trending indicator, as illustrated — and its path of least resistance points higher barring a violation of this area.

And the Technology Select Sector SPDR’s
XLK, -0.15%
backdrop is slightly weaker, though not panic-button material.

While the group has edged nominally under its breakout point, Monday’s downturn was driven by decreased volume. It’s effectively filled the December gap, without breaking down technically.

So collectively, the traditional market leaders remain in consolidation mode, though each group’s uptrend is intact.

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